EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

LEED 2009 and EPAct 179D Tax Savings

LEED, which stands for Leadership in Energy and Environmental Design, is the
fast growing marquee standard for sustainable buildings. LEED is the
certification system established by U.S. Green Building Council (USGBC). The
four certification achievements start at the LEED certified level and proceed
to the higher LEED silver, gold, and platinum levels.╣

On April 27th 2009, the new LEED 2009 system replaced the previous LEED
rating point system for certifying LEED buildings.

The major differences with the new LEED system are:

1. Adjustment to the point system

2. Weighted credits

3. Regional bonus credits

Allocating a substantial increase in LEED points to energy measures is a
practical change reflecting market conditions. This change makes it probable
that a LEED building will qualify for one or more EPAct (Energy Policy Act) IRC
Section 179D energy efficiency tax deductions. The USGBC described the changes,
stating “overall the changes increase the relative emphasis on the
reduction of energy consumption and greenhouse gas admissions associated with
the building systems, transportation, the embodied energy of water, the
embodied energy of materials and where applicable the solid waste.”
Moreover, most buildings built in 2009 are required to comply with local
building energy codes that are in most cases substantially higher than those
applicable during most of the previous LEED system time period. It is important
for tax purposes to realize that under both the prior and the new LEED systems,
buildings must have supporting designed building energy efficiency computer
software models.

The Tax Opportunity

IRC Section 179D, effective January 1, 2006 through December 31st 2013,
provides an immediate tax deduction of up to $1.80 per square foot for building
investments that achieve specified energy cost reductions beyond ASHRAE
90.1-2001 building energy code standards. LEED 2009 utilizes ASHRAE 90.1 2007
as its baseline, which is already an improvement over 2001. Therefore, projects
that are LEED 2009 certified are naturally platformed for tax savings. A
one-time $1.80 per square foot deduction is the maximum tax deduction, but
deductions of up to 60 cents per square foot are also available for three types
of building systems: lighting, HVAC systems, and the building envelope.

The Future of LEED Projects and Professionals

Since the USGBC's introduction of LEED in 2000, the rating system has become
the national standard for green building certification; more than 21,200 LEED
projects have been registered as of May 20092. This number will undoubtedly
increase even more quickly with the introduction of the more multifaceted LEED
2009 system, which includes not only the existing categories of LEED for New
Construction, Existing Buildings, Operations and Maintenance, Core and Shell,
Commercial Interiors, and Schools, but also new categories for Homes and
Neighborhoods and Pilot Programs for Retail and Healthcare facilities. The
anticipated increase in LEED Projects in the future will be met by the growing
number of LEED Accredited Professionals. When the LEED AP credential was
created in 2001, 527 professionals chose to pursue the accreditation; today,
LEED APs number more than 114,0003. With the increasing amount of both LEED
professionals and buildings, the potential for savings under the EPAct should
also experience dramatic growth.

Regional Bonus Points

The establishment of regional bonus points is another practical change
reflecting the major differences in regional environments. For example, in the
northern U.S., energy efficient heating is important where in the south energy
efficient cooling is crucial. In parts of the western U.S., water is a scarce
resource. The performance of alternative energy measures such as solar, wind
and geothermal are highly dependent on regional factors.

The new regional bonus mechanism is to be established by local USGBC
chapters which for purposes of the bonus are to be determined by state and U.S.
possession designation. This may require some adjustments for national property
owners with common building footprints that are striving for a standard LEED
qualifying design.

Introduction of an ASHRAE Green Building Code

The American Society of Heating, Refrigeration and Air Conditioning
Engineers (ASHRAE) has been working diligently on proposed Standard 189.1 the
nation’s first Green Building energy codeČ4. This legislation is intended
to provide minimum criteria for green building practice with major emphasis on
energy and water usage efficiency. The standard is applicable to new commercial
buildings and major renovations. When completed this standard is expected to
address energy efficiency, a buildings impact on the atmosphere, sustainable
sites, water use efficiency, materials and resources, environmental qualify,
and other green building issues. A public review draft may be examined at
www.ashrae.org/publicreviews.

When enacted in each participating state this new code will platform a much
higher percentage of new building and major renovation projects for EPAct
commercial building energy efficiency tax savings.

The LEED / EPAct Tax Deduction Modeling Interface

LEED buildings must be modeled and modeling is mandatory for achieving the
$1.80 maximum tax deduction, the HVAC, and the building envelope tax
deductions.

Since the building energy loads and the reference building standards are
different for LEED and EPAct modeling, it is important to hire tax
professionals familiar with the tax and engineering modeling conversion
process. It is also important to use IRS approved software for both LEED and
the EPAct modeling iteration which will save time, and allow a qualifying
project to obtain tax savings. The current list of IRS approved software is as
follows:

The Government Building Designer Tax Incentive

Building designers including architects, engineers, lighting designers,
design and build firms, and ESCOs (energy service companies) involved in LEED
government building projects, including K-12 public schools, are also
potentially eligible for the EPAct tax incentive. Many federal, state, and
local government agencies and school construction authorities require all
government buildings to be built at a LEED certified level.

The following list illustrates some of the federal agency LEED building
mandates:

Conclusion

Tax professionals involved with LEED buildings should recognize that these
projects are often eligible for substantial EPAct tax savings. This is
particularly the case for LEED platinum and gold buildings, all buildings that
achieved LEED points through energy measures, and new LEED 2009 certified
buildings.